The Russell 2000 Still Calls the Shots

In my column from last Thursday, I highlighted the Russell 2000 small-cap index as having neatly marked last week's lows by pulling back to the bottom of the previous week's Nov. 23 Thanksgiving Day gap at the 798 level, coming within pennies of filling that one and bouncing.

After the bounce off of that level, I suggested that the Russell now might be in the process of marking another turn -- this time a top, presumably after filling its Nov. 7 gap. That gap, you'll recall, was at 825.64. Here's what I said last Thursday about that Nov. 7 gap:

"Now that the Russell 2000 has popped to 823.27, that gap has almost been filled. Once it's filled in its entirety, that might just be itfor the near term. Note that today, the Russell 2000 has left another gap from Wednesday's close at 813.50. And while the Dow and S&P 500 have filled this morning's gaps, the Russell 2000 hasn't done so yet. That's a downside target for another pullback."

So, pretty much on schedule, on Monday morning, the Russell popped up to a high of 826.58, finally taking care of that bit of unfinished business on the upside as it neatly filled its Nov. 7 gap. At the morning highs, the Russell 2000 had exceeded that gap by less than a point. And that was that.

From there, the market hasn't collapsed, but look at what it's doing. It's pulling back as it should. In the case of the Russell 2000, as suggested last week, the pullback has now returned the index to its gap from last Thursday at 813.50. As noted, that gap at 813.50 is "a downside target for another pullback." The low today was 816.08, so the gap has been partially filled. It was originally 813.50-817.95. Now it's been narrowed to 813.50-816.08.

As usual, it's not just one thing that marked Monday's top, though you could have used just the Nov. 7 gap in the Russell to trigger a sell signal. But if that weren't enough, there was the action in the Nasdaq-100 (NDX), which stalled just shy of its early November high at the 2702 level and turned back down from the morning high of 2699, closing lower on the session and 27 points off the morning highs. That also was a sign of a near-term top forming, and a sign of trouble ahead.

Then there was the S&P 500, which again failed to get back to its Nov. 7 gap. It stalled less than 5 points shy of the gap (at 1428.39) and turned back down. Not great action for the SPX. Of note, the E-mini made a high of 1422.75, which was only 2.5 points shy of the gap in the futures from Nov. 7.

Of course, the market had other reasons to top out where and when it did. Notably, it was quite overbought. While not at overbought extremes, Thursday's reading of +169 was the most overbought it has been since September. Friday's reading of +155 was almost as overbought, and so, no surprise, when the market popped up on Monday morning, it couldn't hold its gains.

Was there some big deal news on the fiscal cliff to account for the pullback? Beats me. As usual, I had the sound muted on CNBC. Numbers, as usual, called the turn. The news, as usual, is just noise.

At the time of publication, Schiller was long SPX, DJIA, Nasdaq 100, Russell 2000, and high-yield bond funds at Rydex up to 50% levels; long junk bond funds at Fidelity up to 20% levels; holding bullish short puts in the IWM, QQQ and SPY. Long DIA calls and call spreads. Holding bullish January (put) credit spreads in AAPL.